DEALBOOK; In a Contrast, Yelp Shares Jump After a Lockup Period

By EVELYN M. RUSLI

Published: August 30, 2012

When early investors first get a chance to sell their shares in a newly public company, a stock typically falls as owners pare back their holdings. In the case of Yelp, the stock soared after the so-called lockup period expired.

On Wednesday, shares rose 22.51 percent to close at $22.37, its largest one-day gain since the company went public in March.

Given the gains, it appears that Yelp's early investors decided to stick with their holdings. "It's refreshing to see insiders with discipline," said Michael Pachter, a Wedbush Securities analyst.

The stock got an added boost from short-sellers, investors who were betting that the stock would fall. When the stock rose, they had to cover their positions and buy shares.

Yelp's post-lockup performance stands out from its peers'.

Shares of both Groupon and Facebook dropped sharply after their lockups ended. Facebook hit a record low this month when early investors started to sell some shares.

Peter Thiel, Facebook's first outside investor, sold 20 million shares at roughly $20, or nearly half the original offering price of $38. The large sale by Mr. Thiel, who also sits on Facebook's board, spooked some investors who interpreted it as a sign that insiders were losing faith in the social network.

Many analysts expected the same fate for Yelp. Since mid-August, shares of the online reviews site have been hammered, dragged down in part by concerns that early investors would dump stock once the lockup period ended.

Adding to the pressure, Yelp faces the same challenges of other young Internet companies. While the company is one of the most popular review sites on the Web, it is also struggling to convert more local businesses into paying users. Consumers can get access Yelp's reviews free, and vendors have the option to spend money on advertisements or other services.

But only a fraction of businesses with profiles on Yelp - about 4 percent - pay the company anything. Last quarter, Yelp's revenue rose 67 percent to $32.7 million, although the company recorded a net loss of 3 cents a share.

"This is still a concern," said Aaron Kessler, a Raymond James analyst. "How many businesses will actually advertise on Yelp versus just get free traffic from the site?"

A Yelp spokeswoman declined to comment on Tuesday.

The stock action on Wednesday seems to indicate that Yelp's biggest investors are holding on to their shares - at least for now. The company's five largest shareholders, Bessemer Ventures, Elevation Partners, Benchmark Capital, Max Levchin and Jeremy Stoppelman, the company's chief executive, collectively own more than 80 percent of the company's stock.

Unlike some recent Internet I.P.O.'s, Yelp's biggest holders have been conservative about their stock sales. No insiders sold in the I.P.O., with the exception of the company's charitable foundation, which sold 50,000 shares, according to filings.

In contrast, the game maker Zynga allowed some insiders to sell at the I.P.O. in December and then again at a second offering in April. Shares of the online game company are down 70 percent since its debut.

This is a more complete version of the story than the one that appeared in print.

PHOTO: Jeremy Stoppelman, arm raised, Yelp's chief executive, at the New York Stock Exchange the day the company went public. (PHOTOGRAPH BY RICHARD DREW/ASSOCIATED PRESS)